Northwest Paperboard Company a paper and allied products man

Northwest Paperboard Company, a paper and allied products manufacturer, was seeking to gain a foothold in Canada. Toward that end, the company bought 40% of the outstanding common shares of Vancouver Timber and Milling, Inc., on January 2, 2018, for $490 million.

At the date of purchase, the book value of Vancouver\'s net assets was $820 million. The book values and fair values for all balance sheet items were the same except for inventory and plant facilities. The fair value exceeded book value by $10 million for the inventory and by $15 million for the plant facilities.

The estimated useful life of the plant facilities is 12 years. All inventory acquired was sold during 2018.

Vancouver reported net income of $230 million for the year ended December 31, 2018. Vancouver paid a cash dividend of $50 million.

Required:
1. Prepare all appropriate journal entries related to the investment during 2018.

Record the entry related to the inventory adjustment.

Record the entry related to the depreciation adjustment.
2. What amount should Northwest report as its income from its investment in Vancouver for the year ended December 31, 2018?

3. What amount should Northwest report in its balance sheet as its investment in Vancouver?
4. What should Northwest report in its statement of cash flows regarding its investment in Vancouver?

operating cash flow-  

Investing cash flow-

Solution

PART 1

Event

General Journal

Debit

Credit

1

Investment in Vancouver T&M shares

490

Cash

490

2

Investment in Vancouver T&M shares

92

Investment revenue

92

3

Cash

20

Investment in Vancouver T&M shares

20

4

Investment revenue

4

Investment in Vancouver T&M shares

4

5.

Investment revenue

0.5

Investment in Vancouver T&M shares

0.5

Net income: 230*40% = 92

Dividends: 50*40% = 20

Inventory adjustment: 10*40% = 4

Depreciation adjustment: (15*40%)/12 = 0.5

PART 2

Amount $ 87.5 million

(share income – inventory adjustment – depreciation) = 92-4-0.5

PART 3

Amount $ 557.5 million

Cost + share of income – inventory adjustment – depreciation – dividends

=490+92-4-0.5-20

PART 4

Operating cash flow $87.5-(557.5-490) = 20 inflow

Investing cash flow $490 outflow